Sunday, March 29, 2009

LONDON - The global financial crisis and collapse in the oil market have stalled vital investment in oil exploration and production and are likely to lead to a quick spike in prices, an energy consultant and financier says.

Matt Simmons, founder of Houston-based investment bank Simmons & Co., argues the underlying rate of decline of the world’s aging oilfields is as much as 20 per cent a year and only high levels of investment can reduce that to single digits.

With credit tight and oil prices almost $100 US a barrel below their highs last year, oil companies are unable to sustain previous levels of spending and the result is falling production, he said Thursday.

“We are three, six, maybe nine months away from a price shock. We are not talking about three to five years away — it will be much sooner,” Simmons said.

“These prices now are dangerously low. The lower prices fall, the less oil will be produced and the greater the chance of an oil spike,” he said.

Oil prices hit record highs of almost $150 per barrel last July, but have tumbled since then as the global economic downturn has cut energy consumption by consumers and companies alike.

Prices have rallied from lows below $35 a barrel in December to above $50, but remain well below what many oil companies and producing countries say they need to invest in new production.

Simmons is a proponent of the “peak oil” theory, and has argued for years that world oil output is in irreversible decline because oil industry infrastructure is getting too old.

He says the cost of rebuilding the oil industry is colossal — “closer to $100 trillion than $50 trillion” over decades: “The industry’s asset base is beyond it’s original design life.”

Simmons’ 2005 bestseller Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, argued oil output from the Middle East’s biggest supplier was reaching an apex and would soon decline, ending forever the era of cheap oil.

Saudi Arabian oil company Aramco and many other analysts strongly disagreed with that thesis, saying Simmons exaggerated the rate of decline of older oilfields.

Cambridge Energy Research Associates last year put the rate of decline of the world’s oilfields at just four to five per cent a year.

But Simmons’ concerns over the impact of the credit crisis and the dramatic fall in oil prices are shared by many other, more conservative bodies, including the International Energy Agency (IEA), which advises 28 industrialized nations.

IEA deputy executive director Richard Jones warned the oil market this week that so far as much as two million barrels per day (bpd) of new upstream capacity due to come on stream had been deferred for now due to lack of funds and low oil prices.

The IEA is also worried recent cuts in oil production by the Organization of Petroleum Exporting Countries in an attempt to bolster prices have left oil inventories dangerously low, leaving little room for manoeuvre when oil demand recovers.

Simmons says many OPEC oil producers will find it difficult to bring output back to previous levels once prices recover.

“When you have an old oilfield whose flow is being maintained by extremely high levels of investment and you reduce production, you rarely if ever get back to where it was.”

Because of this and natural declines in output, oil use may not need to rise much before production fails to meet demand.